Unbonding
This month, foreign investors sold Korean bonds worth a total of approximately one trillion won. Their net sales value reached 561 billion won (US$473 million) in June and 2.618 trillion won (US$2.208 billion) in July, too. Malaysian investors accounted for the largest portion, but European funds flowed out as well.
Nevertheless, bond market experts say that the drop in balance is unlikely to result in a massive fund outflow that significantly affects bond yields. “The large-scale disposal is limited to investors in a small number of emerging economies such as Malaysia and Thailand, while those in Switzerland, Norway, and the like are increasing their balance these days,” one of them explained, adding, “The bond price is showing no signs of a decrease, as evidenced by the fact that the three-year treasury rate has remained below 2 percent since March.”
They also point out that the drop in balance is limited to short-term bonds. “Foreign central banks and sovereign wealth funds, which focus on national fundamentals, still hold long-term bonds,” Hana Daetoo Securities mentioned, continuing, “No sign of fund outflow has been found in this part.” Korea’s current account surplus is still solid, and its foreign exchange reserves are showing a gradual increase, too.
Market consensus is that most foreign investors’ funds redeemed at maturity will be reinvested, as the Korean bond yield is more attractive than those of others preferred by short-term investors. At present, the two-year currency stabilization bond of Korea provides a yield of 1.663 percent, whereas those of the two-year German and U.S. treasury bonds are 0.246 percent and 0.74 percent, respectively.
Still, the won-dollar exchange rate can be an important variable in the bond market. “Although an interest rate hike by the Fed is likely to have a short-term impact at best, an additional devaluation of the Chinese yuan, which will lead to the appreciation of the U.S. dollar and the depreciation of the Korean won, can be more powerful than that,” Eugene Investment & Securities predicted.